Why Mergers Don’t Happen

Source: The CPA Journal

Firms that would benefit from a sale or merger:

• Older firms with no successors. If the owner is unable to work, clients may leave and the value of the firm will decline.
• Firms whose growth is dependent on a merger.
• Boutique firms that want to diversify their service offerings.
• Firms struggling with recruiting, technology investments, etc.

Demographic factors suggest that in the next several years, more firms will have to sell or merge, and valuations will decline. Therefore, firms that have characteristics in the list above should consider acting sooner rather than later.

The author interviewed hundreds of small and mid-sized CPA firms that had some interest in sale or merger. Potential acquirers were asked their perceptions of why sellers don’t consummate deals, and potential sellers were asked why they were reluctant to sell. Many of the sellers’ reasons are never communicated to the buyers, and many of the buyers’ perceptions were off the mark. Consequently many deals never get done.

Here are the reasons firms are inhibited from selling:

1. Firms don’t want to give up control. But the degree and transition period for relinquishing control can be negotiated if everything else about the deal is right.
2. It is difficult to find compatible merger partners. To find the right fit, a firm should first determine what it has to offer to another firm, what is most crucial to the partners, the needs of the clients and staff, and what would be an acceptable role for the seller in the new firm. The firm needs to know the percentage mix of its service offerings and client industries. Having documented the answers to these questions, the firm will more readily be able to find the right partner.
3. Firms believe they can make more money if they liquidate their practices over time. But clients and staff may leave, which will diminish the chance for a favorable outcome to such a strategy. A properly structured buy-out and transition can result in more money for both parties if they merge. The retiring partner can maintain his income through the transition period if the retention rate is good and his billable hours don’t decline.
4. Owners believe they don’t have the time to devote to a practice merger. Typically such an attitude is really a self-delusion.
5. Fear of moving into new circumstances. Change is always difficult and is probably worse when you have owned a practice for 40 years. This is probably the number one factor in preventing mergers. Deal with it by consulting with other CPAs who have sold their practices, and by consulting with close advisors or consultants.
6. CPAs don’t know what to do with free time. Even people without other interests have a wide range of options such as travel, time with family, exercise, volunteer work, educational or cultural pursuits, or sports.

From The CPA Journal, A Publication of the New York State Society of CPAs, June 2007. For the complete article click here, then select the article Unspoken Obstacles Prevent Many Accounting Firm Mergers and Sales.